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Brexit’s Impact on the Insurance Industry

Following the UK’s historic advisory vote to leave the EU, key questions must be answered before any real change occurs. These include: Must the government implement the advisory vote, and if so, how?

Will the UK really leave the EU? Will Scotland and Northern Ireland (both of which voted to remain in the EU) have their own referendums to leave the UK—and will they be granted EU status if they do?

While the answers to these questions will have broad implications for businesses across industries, this article addresses insurance companies, many of which are trying to determine whether to leave the UK or remain until the UK’s plans become clearer. At this early stage, insurance companies, regardless of their location or the type of coverage they write (e.g., property and casualty, life, or accident and health), lack the information needed to make decisions. Regardless, they should start weighing potential scenarios. We suggest they evaluate considerations including the following:

Domicile for European Business

Should insurance companies immediately seek another EU country to domicile their European business or take a wait-and-see approach? U.S. companies that use London as their European base may find a move necessary to maintain unfettered access to the EU. As English-speaking countries, Scotland and Ireland (including Northern Ireland) may become attractive options. Additionally, these countries may seek to enact tax and related legislation to entice companies from London. Although some recent EU tax rulings may make this difficult.

Solvency II

The Solvency II Directive ("Solvency II") codifies and harmonizes EU insurance regulation and primarily concerns the amount of capital EU insurance companies must hold to reduce the risk of insolvency. Under Solvency II, the solvency regimes of countries outside the EU are assessed to determine whether they are "equivalent" to those of the EU. If the UK leaves the EU, it would, absent a contrary agreement, no longer be an equivalent country. This would put it on similar footing with the United States (though not an equivalent nation, certain aspects of equivalency have been offered to the United States by the regulatory authority responsible for Solvency II, the European Insurance and Occupational Pensions Authority).

Since the International Association of Insurance Supervisors has chosen Solvency II as a baseline for development of a global safety-and-soundness standard, the UK would be subject to a similar level of standards from global bodies. However, it has been argued that, if the UK exits the EU, the UK would be free to remove any EU regulations that damage the UK economy. Solvency II drove significant business opportunity in the bulk annuity buy-out market. Insurers are being forced to restructure their balance sheets, prompting the sale of billions of pounds of annuity books. Thus, it is unlikely Brexit will impact the Solvency II regulation since that would require insurance companies to restructure their books of business yet again.

European Economic Area

The European Economic Area (EEA) is the area in which the Agreement on the EEA provides for the free movement of persons, goods, services and capital within the European Single Market. If the UK negotiates some form of agreement allowing it continued access to the EU market, while closing its borders to immigrants, the amount and type of change is still open to question; there may be little or none. However, at this point, it appears EU politicians are adamant that immigration and access to the EEA go hand in hand, i.e., you cannot get one without the other. If that view controls, little would likely change for companies located in the UK.

Reverting to World Trade Organization Rules

Absent a federal trade agreement covering services with the EU, financial services firms, including insurance companies, licensed in the UK will face the same barriers to EU entry as non-EU countries. As a result, the UK’s insurance firms will have to establish branches within individual EU member states, and comply with EU regulations, capital requirements, and employment laws.

Companies with UK Parents

With the pound losing strength, the financial stability of the entire business entity could be at risk. Insurance companies should examine and adjust their enterprise risk management systems.

Passporting

Through the practice of "passporting," firms registered in the European Economic Area (EEA) can do business in any other EEA state without obtaining further authorization in each country.

If the UK leaves the EU, insurance companies that use their UK license to write risks in other EU countries will be required to get licenses in the other countries. In addition, companies that use passporting to enter the UK will have similar concerns, and may be required to obtain UK licenses. As London is among the world’s largest insurance hubs, this issue may present significant challenges.

Some Additional Considerations

Cybersecurity

Data privacy issues (e.g., which standard will be followed the UK, the EU, both, or another country’s?)

Will the UK remain on the National Association of Insurance Commissioners’ list of qualified foreign jurisdictions for doing business in the United States?

Tax implications once the UK is no longer part of the EU VAT system

Will the UK vary its anti-money laundering directive, and if so how will entities doing business in the UK be impacted?

Conclusion

The only certainty is that the relationship between the UK and the EU will change. We won’t have answers to the many questions raised by Brexit until the UK exercises its right to withdraw from the EU pursuant to Article 50 of the Lisbon Treaty, at which point the two-year clock begins to run. For now, the best strategy is to allow the politicians and government entities to determine their strategies.

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